Overview: Auctions and Bidding
• Introduction to Auctions
– Open-outcry: ascending, descending
– Sealed-bid: first-price, second-price
• Private Value Auctions
• Common Value Auctions
– “Winner’s curse”
• Auction design affects “gaming” options
Examples of Auctions
• Internet
• EBay.com, Amazon.com, Liquidation.com
• Government
• Treasury Bills, mineral rights (e.g. oil fields), assets
(e.g. privatization)
• Electromagnetic spectrum
• Stocks
• IPO: Google
• Repurchases
• Procurement auctions/Subcontracting
• Automobiles: Valeo (GM, Daimler-Chrysler, etc..),
Visteon (Ford)
1
Ways to Categorize Auctions
• Number of objects
– We focus on single object auctions, but ideas
apply to multi-unit auctions
• Role of information / Type of valuation
– Private value vs. Common value
• Rules of auction
– Ascending (Ebay or Sotheby’s), first-price (oil
tracts), etc..
Auction Formats
• Open outcry auction
– Ascending Auctions (English)
• Auctioneer announces ever increasing prices to
solicit bids. Continues until only one person left in.
– Descending Auctions (Dutch)
• Auctioneer announces decreasing prices until
someone puts up their hand.
• Sealed bid auction
• Everyone puts bids in envelopes and gives to seller
at the same time.
• First price, Second price
2
Private Value Auctions
• Each bidder knows his/her own valuation.
⇒
My valuation does not depend on
your information
• When is an auction likely not to have
purely private values?
– Resale possible
– Some bidders are “experts”
Common Value Auctions
• All bidders have the same valuation but
they don’t know what it is.
⇒
My valuation now does depend on
your information
• Most real-world auctions have a mixture of
private and common values.
Private Value Common Value
3
Example: Art Auction
• 3 individuals with private values of $60,000,
$70,000 and $80,000 for a work of art
• What will happen in the ascending auction?
• What if we used a descending auction?
Ascending vs. Descending Auctions
• Do bidders bid their true valuation in ascending or descending auctions?
• Ascending: Yes - bidding up to your true valuation is the dominant strategy • Descending: No - each bidder “shades down”
his bid.
– Risk averse bidders shade less
4
More Bidders Matters
• What if there were more bidders, say with private
values of $60,000, $61,000, … , $79,000,
$80,000?
• More revenue in both ascending and descending
• Ascending: Second-highest value is now $79,000
• Descending: Less incentive to shade bid since it’s
more likely someone else will jump in with more
bidders
5
Open Outcry vs. Sealed Bids
• Second-price auction is equivalent to
ascending auction
– Winner pays second-highest (sealed) bid,
virtually same as with an ascending auction
• First-price auction is equivalent to
descending auction
– Same considerations in formulating bids
6
Bidding for an Oil Block
• Five People will bid, in one-time first-price
auction. The top bid gets the block
• The true value of the field = XTrue, but no
bidder knows what XTrue is. It will be
revealed (drilled) after the bidding.
• Each bidder hires his/her own consultant to
give an expert estimate of the value.
How Good Are the Experts?
• Oil experts can estimate reserves only with some error.
• The distribution of these types of oil estimates tends to be
the following:
⎧X True +40
⎪ True
⎪⎪ X + 20
Consultant' s Estimate = ⎨ X True
⎪ X True − 20
⎪
⎪⎩X True − 40
w. p. 1/ 5
w. p.
w. p.
w. p.
w. p.
1/ 5
1/ 5
1/ 5
1/ 5
• Given your consultant’s estimate, how much will you bid?
7
Winner’s Curse
• Winner’s Curse = Tendency to overbid due to
the fact that bidder with highest estimate (or
signal) will win
– An issue in all common value auctions, worse with
more bidders participating
– To avoid the curse, simply assume your signal is
the most overly optimistic when bidding
• Winner’s Curse
≠ “Money Left on the Table”
8
Internet Auctions
• Millions of auctions each day.
• Ebay format (most popular site)
– Ascending auction
– Second price (pay slightly above)
– Auction ends exactly at a prespecified time
• Amazon format
– Auction ends once no new bids have been
made for 10 minutes (i.e. flexible end time)
“Proxy Bidding” and “Sniping”
• “Proxy bidding” = programming a proxy
bidder to bid up to your maximum willingness to
pay at the beginning of the auction
• “Sniping” = bidding at the last moment
• Do you think sniping is more prevalent on EBay
or Amazon? Why?
• What risks are there to submitting a proxy bid?
9
Cumulative dist’n of auctions’ last bids over time
Bid Rigging
• Bid Rigging can be a big problem!
• PCS (Personal Communication System)
auctions (April 1997)
• Marsh & McLennan and commercial
insurance
10
Take Away Points
• Don’t forget the winner's curse
• Auctions are a way to 'discover the right price'.
• In second-price private-value auctions, you
should bid your true valuation.
• Auction design influences behavior and
performance:
– More bidders increases revenue.
– Fixed ending times lead to sniping, which may reduce
revenue.
– First-price auctions may increase revenue when bidders are
risk-averse.
11